Forums: Discussions for entrepreneurs and small business.

Please give input on the following proposal:

Loan size of $300K.  Manufacturing company 9 months in business with increasing sales trend.  Plenty of projects in the pipeline.

Terms:  2 years payback on investment, 12% annual ROI, 15% non-voting ownership on company, first payment after 90 days on a quarterly basis. 

Opinions please.  Thank you.

Quick points:

1. You will need to show/demonstrate that the business can service the debt, which means you`ll have enough cash flow after only 90 days to make the payments!!!

2. If you can service the debt - then you may not need to include the equity.

3. If you include non-voting equity in the deal, you`ll have some liquidity event - so they can get their cash.

Robert Johnson

The "non-voting ownership" sounds terrible to investors. The figure of 15% for $300k gives your business a valuation of $2,000,000. Do you think that`s realistic? I don`t know if it is or not. I think that the non-voting-ownership is really going to rub investors the wrong way. You should read a book on venture capital, if you haven`t already. I cannot think of any investor who would part with $300,000 without at least some control. Also familiarize yourself with valuation. I do however like the shortness and clarity of your pitch. Excellent job in that respect.

CookieMonster,

While your math is accurate- remember that Christian said he was looking for a loan of $300K with a 2 year payback. I gather that the ownership was intended to be a "kicker" on the deal - in which case it would be customary for that to be non-voting.

Since he is talking about a loan - he will need show that the company will be able to service the debt. For example, the monthly payments would be about $14.000 per month. A hefty amount for a growing business.

Robert Johnson

If it`s a loan collateralized with 15% of the company, then the topic of valuation will certainly arise. Heck, the topic of valuation is going to arise pretty much no matter what. This isn`t a $3000 or even $30,000 loan. Any investor worth his or her salt is going to think at least once or twice about whether or not the company is worth the $2,000,000 implied by a $300k loan for 15% of the company. It`s just basic math and basic common sense.

Second, I have strong doubts that many investors are going to make a $300k investment without receiving any say so in operations. It`s just not common sense either. In any event, even with the return of the stock when the loan is repaid, most investors are going to think about what could happen in that 2 year period. I think a $30,000 or even $50,000 loan is possible without any voting stock, but $300,000 and perhaps no hard assets for collateral. I doubt it.

And at the end of the day, asking an investor for a $300,000 loan with no voting stock is a bit like saying, "thanks for the $300,000 now keep your nose out of it". And that certainly does sound terrible. There are a lot of venture capital and seed capital deals cut for $300,000 and a hefty amount of stock changes hands.

Just a few comments:

1.      Valuation. Yes, the figures stated by Christian indicate a pre-money valuation of $2 million. I don’t have the specifics of this situation but on the surface I don’t view this as a ridiculously high number. I don’t mean to say that if one marched into a venture capital firm with just an idea –they would agree with the valuation. However, we have helped many fledging companies acquire equity capital where the valuation (implied or stated) was higher.

2.      Voting rights. In practice having 15% of the outstanding common stock in a company – gives one very little “say in the operations”. It might not even be enough to secure “representation” on the board. 

3.      Generally lenders don’t have a say in the operations in a general way. They may place some limits or restrictions on certain transaction but that is a point of negotiation.

4.      From the lenders perspective, I would be much more concerned about the ability of the company to service the debt than the voting rights.

5.      Finally in response to the original question (How does this sound) – I think it will be a challenge to “sell”. The deal is neither “fish nor fowl” because it’s not a (seemingly) good loan proposal nor is it a solid equity opportunity.

6.      I think there are better ways to acquire the capital with less challenges.